Foreign bank custodians seek clarity on direct investments

MUMBAI: Direct investments in Indian equities by foreign investors have turned out to be non-starter with policy makers still trying to iron out issues relating to countries that would qualify as origin of investments, custodian's liability associated with tax and on know-your-customer norms.

Market regulator Sebi and finance ministry officials have been holding meetings with market intermediaries seeking their feedback to make the required changes in rules.

Some of the officials who have attended these meetings said Sebi will have to provide more clarity on the list of countries from where investors would be allowed to directly buy or sell stocks.

At present, rules say a qualified foreign investor (QFI) needs to be resident of a Financial Action Task Force (FATF) compliant country and a signatory of International Organisation of Securities Commission's (IOSCO's) multilateral memorandum of understanding. Custodians say as a result of this only 18 countries qualify, the list also excludes Mauritius, Gulf Nations and Canada.

"We have asked the regulators to only provide us with a list of eligible countries to avoid any confusion on this front," said a senior official with a foreign bank.

"To simply the process of entry of QFI into India, regulated intermediaries in the FATF jurisdictions should be allowed to attest the signature and documents for completing the know-your-customer procedures," said Atul Gupta, managing director of Orbis Financials, a custodial services provider.

On January 1, foreign resident investors were allowed to invest directly in Indian stocks by the government in a bid to boost capital inflows and to deepen the capital markets. Soon after this, financial sector regulators announced stringent rules to prevent routing of money by resident Indians through this new avenue while allowing them to buy up to 5% of the paid-up capital of a company while capping the overall limit at 10%.

It is learnt that custodians have also expressed their discomfort in taking the tax responsibility on them. "Most of the foreign and private banks are unwilling to take the liability associated with tax, and have expressed concerns in giving a tax-certificate to their clients," said a senior official with a foreign bank custodian. "We have suggested that this responsibility should be outsourced to a tax expert who can issue this certificate," he said.

Some of the foreign custodian banks have also said they would not like to get involved with pre-trade related activity as they currently restrict themselves to only post-trade functions. "Today, RBI norms require a bank's custodial services to be separate from its equities business," said another official who attended the meetings with regulators. "If we have to fulfil the Sebi rule, we will end up violating RBI norms," said the official.